Ch. 13 - Jurisdictional Issues in Business Taxation

Question 1

True or false: TCJA limited the federal deduction for state income taxes taken as an itemized deduction by individuals

Answer 1

True

Question 2

True or false: for federal purposes, corporations are not allowed to deduct state income tax in the computation of taxable income

Answer 2

False–they are allowed to

Question 3

Most states apply a net income tax to ________ ________?

Answer 3

Business earnings, but some states have adopted tax systems that tax gross revenues instead of net earnings

Question 4

Commerce Clause

Answer 4

Article 1 of the U.S. Constitution that grants the federal government the power to regulate interstate commerce.

Question 5

Nexus

Answer 5

The degree of contact between a business and a state necessary to establish the state’s jurisdiction to tax the business.

Question 6

True or false: firms establish nexus by selling tangible good to customers residing in a state

Answer 6

False–firms DO NOT establish nexus by simply selling tangible good to customers residing in a state.

HOWEVER, this only applies to business that sell tangible goods. Nonresident firms providing services (including the leasing of tangible property) or marketing intangible property to ins-state residents are not immune to the state in questions taxing jurisdiction. Some states argue that any firm conducting a regular commercial activity within the state has established economic nexus.

And, this only applies to nexus for income tax purposes. Thus, a seller of tangible good could still be subject to gross receipts taxes and sales taxes in state d in which it sells its products.

Question 7

If a entity does not have nexus with a state, do they have to pay income tax to that state? Explain

Answer 7

No–if they do not have nexus (aka they simply sell tangible good to customers residing in that that), they do not have to pay income taxes to the state in question.

Question 8

Uniform Division of Income for Tax Purposes Act (UDITPA)

Answer 8

A model act describing a recommended method for apportioning a firm’s taxable income among multiple state jurisdictions.

Question 9

apportionment

Answer 9

A method of dividing a firm’s taxable income among the various states with jurisdiction to tax the firm’s business activities.

Question 10

income tax treaty

Answer 10

A bilateral agreement between the governments of two countries defining and limiting each country’s respective tax jurisdiction.

Under a typical treaty, a firm’s income is taxable only by the country of residence (the home country) unless the firm maintains a permanent establishment in the other country (the host country).

Question 11

permanent establishment

Answer 11

A fixed location at which a firm carries on its regular commercial activities. For income tax treaty purposes, a country has no jurisdiction to tax a foreign business entity unless the entity maintains a permanent establishment in the country.

Question 12

True or false: a U.S. firm conducting business in a treaty country avoid that country’s income tax if it does not maintain a fixed place of business in the home country

Answer 12

True!

Question 13

True or false: the U.S. has a global tax system under which its citizens, permanent residents, and domestic corporations are taxed on worldwide income.

Answer 13

True

In other words, when the U.S. is the home country, it claims jurisdiction to tax income regardless f where that income is earned.

Question 14

outbound transaction

Answer 14

A transaction by which a U.S. firm engages in business in a foreign jurisdiction.

Question 15

True or false: firms cannot deduct foreign income taxes paid or accrued during the taxable year

Answer 15

False–they can

Question 16

foreign tax credit

Answer 16

A credit against U.S. tax based on foreign income tax paid or accrued during the year.

Question 17

The foreign tax credit is available to what kind of taxes?

Answer 17

Only income taxes. It is not available to foreign excise, value-added, sales, property, and transfer taxes.

Question 18

What limitation is the foreign tax credit subject to?

Answer 18

The annual credit cannot exceed a specific percentage of the precredit U.S. tax for the year. This percentage is computed by dividing the taxpayers foreign source income by taxable income

Question 19

Foreign source income

Answer 19

Taxable income attributable to a U.S. firm’s business activities carried on in a foreign jurisdiction.

Question 20

excess foreign tax credit

Answer 20

Foreign tax paid or accrued during the year but not credited against U.S. tax because of the foreign tax credit limitation.

When a firm is subject to the foreign tax credit limitation, the excess foreign tax credit (foreign tax paid but not credited) can be carried back 1 year and forward 10 years

Question 21

cross-crediting

Answer 21

Crediting the excess foreign tax paid in high-tax jurisdictions against the excess limitation attributable to income earned in low-tax jurisdictions.

Question 22

foreign-derived intangible income (FDII)

Answer 22

Export income of a U.S. corporation from foreign sales and services that qualifies for a reduced effective tax rate of 13.125 percent.

Question 23

Branch office

Answer 23

U.S. Firms wanting to establish a presence in a foreign country can open a branch office. A branch office is not a separate legal entity but is merely an extension of the U.S. firm. Any income or loss generated by the foreign branch is commingled with income and losses from the firm’s other business activities.

Income is subject to U.S. tax. Any foreign tax paid on branch income is included in the computation of the foreign tax credit

Question 24

Explain the difference between branch offices and domestic subsidiaries when it comes to tax consequences.

Answer 24

There are none; the tax consequences are virtually identical.

Question 25

True or false: A domestic subsidiary is not allowed to file a consolidated tax return with its parent company

Answer 25

False–domestic subsidiaries can file a consolidated tax return.

The parent subsidiary can file a consolidated U.S. tax return so that profits and losses generated by the overseas business are combined with those of the parent and any other domestic subsidiaries.

Question 26

True or false: a domestic subsidiaries can elect a consolidated foreign tax credit for income taxes paid by the subsidiary and any other corporation in the group

Answer 26

True!

Question 27

Foreign subsidiaries

Answer 27

When a U.S. corporation creates a subsidiary under the laws of a foreign jurisdiction. In this case, the subsidiary is a foreign corporation, even though it is completely controlled by a U.S. parent.

Question 28

When a U.S. corporation conducts business through a foreign subsidiary, the subsidiary’s activities (can/cannot) be combined with those of the parent

Answer 28

Cannot be combined, because foreign subsidiaries cannot be included in a U.S. consolidated tax return

Question 29

True or False: income generated by a foreign subsidiary is included in taxable income

Answer 29

False–it is not (because it is a foreign subsidiary). If it was domestic, it would be.

Question 30

True or false: losses sustained by a foreign subsidiary can be used to shelter losses from the parent company in the U.S.

Answer 30

False–they cannot be.

Question 31

Prior to TCJA, foreign source insomce earned by a foreign corporation was/was not subject to U.S. tax

Answer 31

Was not, unless and until the corporation paid a dividend to the U.S. shareholder